March 19, 2023
Americas Tax Policy: This Week in Tax Policy for March 17
This week (March 20-24)
Congress: The Senate will next convene at 3 p.m. on Tuesday, March 21, with a vote at 5:30 p.m. on the motion to proceed to S.316, a bill to repeal the authorizations for use of military force against Iraq. The House Republican retreat begins Sunday in Orlando. The House is coming back in session on Wednesday, March 22.
Finance: The Senate Finance Committee has noticed a hearing on "The President's 2023 Trade Policy Agenda" for Thursday, March 23 at 10 a.m. One topic for discussion may be Sec. Yellen's recent comments that future limited free trade agreements focused on battery minerals with the European Union and other allies wouldn't need approval from Congress, which members from both parties have cited concerns about.
A Finance Committee hearing on "The President's Fiscal Year 2024 Health and Human Services Budget" with HHS Sec. Xavier Becerra is set for Wednesday, March 22 at 10 a.m.
Ways and Means: The House Ways and Means Health Subcommittee will hold a hearing on "Why Health Care is Unaffordable: The Fallout of Democrats' Inflation on Patients and Small Businesses" on Thursday, March 23 at 2 p.m.
Last week (March 13-17)
Yellen hearing #2: Treasury Secretary Janet Yellen appeared before the Senate Finance Committee to discuss the President's FY 2024 Budget March 16. As was the case at the Ways and Means Committee last week, the focus in the tax area was on Republican scrutiny of the OECD-led global tax agreement, particularly the undertaxed profits rule (UTPR) that Senator Todd Young (R-IN) said would "uniquely disadvantage American workers and job-creating businesses by providing our trading partners with the political blessing to tax the US activity of US companies." Other Republicans questioned whether the UTPR would violate US tax treaties. Ranking Member Mike Crapo (R-ID) said in his opening statement, "The latest OECD guidance confirms the Administration has agreed to allow foreign countries to collect U.S. GILTI revenue, and worse, tax U.S. companies on their U.S. profits in violation of our tax treaties." Sec. Yellen said, "This is something that the OECD considered very carefully and there's no violation of our tax treaties." Senator Chuck Grassley (R-IA) said Republicans don't agree with that analysis regarding the violation of tax treaties. "Only Congress has the power to approve tax treaties," he said. Senator Steve Daines (R-MT) questioned allowing other countries to tax American companies on their US operations if they fall below the minimum tax threshold, even if it is because of utilizing the R&D credit. Sec. Yellen said the agreement does include a UTPR by which other countries can exercise their rights to impose taxes on profits of companies if those profits are not subject to a 15% minimum tax as defined by the Pillar Two rules. She added that the US could impose its own qualified domestic minimum top-up tax to ensure the revenues that would otherwise be collected by other countries under their UTPRs end up in the US Treasury. The Administration's FY 2024 budget released last week includes a proposal to do just that. Members also targeted questions toward the banking crisis, implementation of Inflation Reduction Act (IRA) energy tax credits, and the IRA $80 billion IRS funding increase will be implemented, which Sec. Yellen said will be mapped out within weeks.
Budget messaging: Also during the hearing, Republican members said they had concerns with the tax increase proposals in the Budget but, between the OECD, energy tax, and the banking crisis, some admitted there just wasn't time to get into them, most of which are well-known already from previous Biden budgets and the House Build Back Better Act. Committee leaders framed the tax policy arguments lawmakers are taking into the debt limit negotiations and probably into the 2024 election campaign. Chairman Ron Wyden (D-OR) said, similar to comments he has made for the past several years: "There's one set of rules for people who work for a living, teachers, nurses and firefighters, who pay taxes straight out of every paycheck. Then there's another set of rules for the uber-wealthy, who can pay what they want, when they want, and potentially nothing at all." Ranking Member Crapo championed the competitive tax rates of the 2017 Republican TCJA and said, "Instead of considering bipartisan, pro-growth policies, the President's budget includes a whopping $4.7 trillion of new and increased taxes on American job creators, which ultimately means fewer jobs and lower wages." Wyden's argument, which has roots going back at least to the 2011 Obama-era "Buffett Rule," is consistent with the President's Budget, which said, "no billionaire should ever pay a lower tax rate than a schoolteacher or a firefighter." During an appearance before the Senate Budget Committee March 15, OMB Director Shalanda Young said, "The President's vision is clear here: there are billionaires, hundreds of millionaires in this country who pay a less effective tax rate than nurses, teachers and firefighters. Some analyses have shown some billionaires have an effective tax rate of 8%. The President believes that is inherently unfair." Director Young refuted GOP assertions that the President is proposing for the 2025 TJCA provisions to expire, saying, "We very clearly in the budget state that the President would support extending those tax cuts for those making under $400,000. Now he does believe we should pay for those."
2025 TCJA debate begins: The Budget proposal lays out President Biden's preferred path of tax increases to raise additional revenue and reduce the deficit. House Republicans say deficit reduction is needed to tame the debt and should be accomplished through spending cuts. They also argue that the TCJA individual and pass-through tax provisions that expire at the end of 2025 should be extended. The President's Budget document includes new statements addressing his willingness to consider extension of the 2025 TCJA expirations, though under certain parameters that include: a focus on rewarding work not wealth; no tax increases on those earning less than $400,000 annually; opposition to "cutting taxes for the wealthy — either extending tax cuts for the wealthy or bringing back tax breaks that would benefit the wealthy;" and, as Director Young mentioned, paying for "the continuation of tax cuts for people earning less than $400,000 in a fiscally responsible manner."
The debate over the 2025 TCJA expiring provisions is factoring into the current House Republican call for spending cuts. The Congressional Budget Office published a report March 14 saying the extension of the TCJA provisions would reduce revenues over the 10-year budget window, so that "larger reductions in spending would be needed to balance the budget," as some Republicans are calling for. The report considers the 2017 law's changes to individual income tax provisions, the higher estate and gift tax exemptions, the changes to the tax treatment of investment costs, and changes to certain business tax provisions. The report doesn't include new estimates of those changes. Rather, it relies on CBO estimates from the Budget and Economic Outlook 2022 to 2032 that found extension of TCJA provisions through 2032 would cost over $2.5 trillion. The report was requested by Finance Committee Chairman Wyden and Senate Budget Committee Chairman Sheldon Whitehouse (D-RI). A Senate Budget Committee release said the report "found that balancing the budget in 10 years would be mathematically impossible if Republicans kept Social Security, Medicare, defense, and veterans' programs whole while also making permanent the Trump tax breaks for the very wealthy." Senator Whitehouse said, "While they would permanently extend the Trump tax giveaways for their wealthy donors, Republicans have pledged to use draconian cuts to pro-growth investments for everyday Americans to balance the budget in 10 years." House Republican plans to balance the budget haven't been specified. Their budget blueprint, or budget resolution, is expected to be released the second week in May, according to Budget Committee Chairman Jodey Arrington (R-TX).
Debt limit: Also during the Finance hearing, Sec. Yellen said that Treasury finds unworkable the suggestion that it prioritize debt payments in the event that the debt limit is exceeded, maintaining that doing so amounts to default by another name. Congress is expected to be required to address the debt limit in roughly the middle of the year and there is hope that release of the Republican budget in May will touch off additional bipartisan budget talks toward that end. A March 16 Washington Post opinion column argued, "If it was a bad idea to threaten default on U.S. debt before, it would be astoundingly, colossally idiotic now. Recent financial-market turmoil — in regional U.S. banks, as well as some of the larger European institutions — suggests there might be much more fragility in the financial system than previously understood." The column said, "In the best of times, this kind of behavior could spook markets and set off a global financial crisis. Today, when there's already mounting anxiety about the balance sheets of some financial institutions, is far from the best of times. Even hinting at default could trigger more panic in global markets."
R&D: The Wall Street Journal reported on the TCJA IRC Section 174 five-year R&D amortization requirement that took effect in 2022, "For many biotech companies, contract manufacturers and software firms, the law means losing the ability to deduct the bulk of their expenses on the tax returns they are about to file. That means some businesses that broke even or lost money in 2022 are considered profitable for tax purposes — and are finding they owe money to the Internal Revenue Service." The story noted that addressing the provision is caught up in the partisan impasse over the Child Tax Credit — Democrats want the CTC expanded in any bill that would roll back R&D amortization and other business tax relief changes, but Republicans say the expansion sought by Democrats removes incentives to work — but nonetheless cited Chairman Wyden as saying of 174, "I'm open to ideas. We've got to get this done."
Sens. Young and Maggie Hassan (D-NH) March 16 reintroduced their bill (S. 866) to roll back the IRC Section 174 R&D amortization requirement and otherwise enhance tax benefits for research activities. The American Innovation and Jobs Act would restore incentives for long-term R&D investment by ensuring that companies can fully deduct R&D expenses each year, raise the cap over time for the refundable R&D tax credit for small businesses and startups, and expand eligibility for the refundable R&D tax credit so that more startups and new businesses can use it.